Non-GAAP Earnings and Board Connectedness in a Multiplex Network

Posted: 18 Mar 2021

See all articles by Monika Causholli

Monika Causholli

University of Kentucky - Von Allmen School of Accountancy

Nicole Thorne Jenkins

University of Virginia - McIntire School of Commerce

Valbona Sulcaj

University of Texas at El Paso - Department of Accounting & Information Systems

Date Written: May 2020

Abstract

We examine whether the quality of non-GAAP earnings disclosures varies with the board of directors’ connectedness. We construct a two-layer multiplex network where nodes represent boards while ties represent shared directorships in the first layer and industry membership in the second layer. The overlap between the layers creates a network where central boards have greater access to more relevant information and best practices relative to peripheral boards. We use this multiplex centrality to capture board connectedness. Relying on two governance theories, namely, resource dependence theory and agency theory, we predict that better connected boards in the network are better able to not only mitigate managerial opportunism but also to advise and counsel management in developing and disclosing higher quality non-GAAP earnings. Consistent with our predictions, we find that firms with highly central boards have less persistent non-GAAP exclusions, are less likely to receive a non-GAAP comment from the SEC, and are less likely to use non-GAAP exclusions to meet or beat earnings benchmarks. Our study extends prior literature on the role of corporate governance on non-GAAP earnings quality.

Keywords: Board Connectedness, non-GAAP Earnings, SEC Comment Letters, Multiplex Network, Beta Centrality.

JEL Classification: M40, M41, G30, D85, L14

Suggested Citation

Causholli, Monika and Jenkins, Nicole Thorne and Sulcaj, Valbona, Non-GAAP Earnings and Board Connectedness in a Multiplex Network (May 2020). Available at SSRN: https://ssrn.com/abstract=3805021

Monika Causholli

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States

Nicole Thorne Jenkins

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

HOME PAGE: http://https://www.commerce.virginia.edu/faculty/nt4jw

Valbona Sulcaj (Contact Author)

University of Texas at El Paso - Department of Accounting & Information Systems

College of Business Administration
500 West University Avenue
El Paso, TX 79968
United States

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